Presidential budget proposals with draconian cuts to crop insurance aren’t new, but you can guarantee it is drumming up concerns over the impact of the latest suggestions.
The budget recently released by the White House would cut the federal crop insurance program by $28.5 billion — or roughly 36% over 10 years. Trump’s proposal goes beyond previously proposed legislative changes and targets crop insurance subsidies to producers that have an Adjusted Gross Income of $500,000 or less; establishing a limit of $40,000 for premium subsidies an individual may receive; and eliminating subsidized harvest price revenue coverage.
The harvest price option (HPO) crop insurance policy provides protection on lost production at the higher of the price projected just before planting time or the price at harvest. HPO is critical to farmers who use forward contracting as another means of mitigating their risk as well as livestock producers who grow their own feed.
A Governmental Accountability Office (GAO) analysis shows that a $40,000 premium support cap would have affected 26% of total insured liability in the crop insurance program in 2011. “So while a premium subsidy cap might only impact a small number of producers, it would put a very large portion of crop production at risk,” the crop insurance industry noted.
As limitations are placed on the discounts for crop insurance, farmers will buy less crop insurance or not buy it at all. The impact will be largest for lower risk farmers, crops and regions. That will change the “risk pool.” As the pool becomes more risky, the premiums for every farmer in that risk pool are likely to increase.
“According to USDA data, midsize family farms, large family farms and nonfamily farms represent only 10.3% of all farms in the U.S. However, they represent 51.7% of the acres operated and 75.8% of the value of agricultural production. So depending where the AGI limit is set, it could put greater than three-fourths of U.S. ag production at risk,” said Sarah Hubbard, spokesperson for the crop insurance industry.
National Association of Wheat Growers President David Schemm noted, “Any reduction in the discount for crop insurance will increase the cost of crop insurance to farmers. As commodity prices decline and farmers’ budgets tighten, an increase in the cost of crop insurance is only more likely to result in less participation and higher premiums for all farmers.”
During a House agricultural appropriations subcommittee featuring Perdue, Rep. Kevin Yoder, R-Kan, reiterated that as commodity prices have slid this year, the crop insurance safety net is critical to farmers who are struggling to maintain their farms.
Sec. Perdue responded by saying that, “I think you won’t get any disagreement with me regarding the value of crop insurance.”
He added that, “Farming is expensive. It has a lot of risk involved in it. I doubt that many of us today would want to put almost all of our equity in the ground looking for a seed to come up each year. So we know the dedication of them, and our nation is the beneficiary of their risk-taking and those values that you describe. Crop insurance is an integral part of that, how we right size that.
“I think the goal for the farm bill—and these are obviously policies, as you know, that will be really determined in the 2018 Farm Bill. So from the budget perspective, there will be a lot of discussion over these going forward. My goal, my principle, I guess, as USDA Secretary, as we help to advise and consult as you all deal with the farm bill, is devise programs that let the market determine what people plant.”
While testifying before the Senate Agriculture Committee, USDA chief economist Robert Johansson also said the benefits of crop insurance were codified in the 2014 farm bill as legislators saw producers were able to weather the drought of 2012 without asking for ad hoc assistance because of effective risk management provided by crop insurance.
Nathan Kauffman, assistant vice president and economist at the Federal Reserve Bank of Kansas City, noted when it comes to availability of credit and the ability to limit downside risks, most lenders require crop insurance.
Luckily, for producers who rely on crop insurance, the tone from farm-state Congressional members recognizes the important role that crop insurance plays in risk management. But that doesn't mean the fight is over.
“Over the course of the past few years the program has emerged as a continuing policy issue for policy and philosophical reasons," said David Ladd, president of RDL & Associates. “In the end, Congress passes the budget and agriculture has generally been successful in making the case for crop insurance and mitigating proposed reductions. Each battle, however, expends political capital and emboldens critics including members of Congress.”